Observations on politics, news, culture and humor

Prepare to pick up your jaw…

from the floor when you read this NYT piece on the scope of bad stewardship of state and local government pension funds. If you want to play a fun guessing game, see if you can guess now which state’s public employee pension scheme is expected to be broke by 2018. Find out that and more after the jump.

Just like there are no-no-yes shots in basketball, there are also yes-yes-no sequences of three paragraphs like this one:

Illinois raised its retirement age to 67, the highest of any state, and capped public pensions at $106,800 a year. Arizona, New York, Missouri and Mississippi will make people work more years to earn pensions. Virginia is requiring employees to pay into the state pension fund for the first time. New Jersey will not give anyone pension credit unless they work at least 32 hours a week.

“We can’t afford to deny reality or delay action any longer,” said Gov. Pat Quinn of Illinois, adding that his state’s pension cuts, enacted in March, will save some $300 million in the first year alone.

But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect.

Feeling deflated yet? How about I cheer you up with an answer to that broke pension system question I asked earlier?

Joshua D. Rauh, an associate professor of finance at Northwestern University who studies public pension funds, predicts that at the current rate, Illinois’s pension system could run out of money by 2018. He believes the funds of other troubled states — including New Jersey, Indiana and Connecticut — are also on track to run out of money in less than a decade, unless they make meaningful changes.

If a state pension fund ran out of money, the state would be legally bound to make good on retirees’ benefits. But paying public pensions straight out of general revenue would be ruinous. In Illinois’s case, it would consume about half the state’s cash every year, bringing other vital state services to a standstill.

Mr. Rauh said he thinks any state caught in that trap would have little choice but to seek a federal bailout. Bigger pension contributions and higher taxes can go only so far.

Clearly, the only thing better than paying outrageous salaries and benefits for federal employees as well as your own state and local employees is paying for outrageous salaries and benefits for other people’s state and local employees!

Luckily, there is some degree of hope:

Some of those cuts set off titanic battles. The most famous was at I.B.M., which changed its pension plan just when many of its older workers were about to earn sharply higher retirement benefits. Aggrieved workers sued, but after a long battle, a federal appellate court found that the cuts were legal.

“An employer is free to move from one legal plan to another legal plan, provided that it does not diminish vested interests,” or the benefits workers have already earned, wrote Chief Judge Frank H. Easterbrook of the Seventh Circuit Court of Appeals in Chicago. He did not distinguish between corporate employers and states.

Colorado is basing its legal defense, in part, on a 1961 state supreme court ruling that said pension cuts for current workers were allowed if “actuarially necessary,” and will argue that it applies to retirees as well. Other states may not have such legal tools.

This is a battle the American taxpayer cannot afford to lose. If government employees were unfairly compensated and living in penury, I might feel sorry for them. Instead, they have managed to create an incredibly preferential system of salaries and benefits for themselves that far exceeds what private sector workers get..and is in fact paid for by those same private sector workers. Yeesh. This is about the 18th time I have recommended it, but everyone needs to read Reason’s excellent piece on exactly this issue of private and public compensation.

I would be more upset and worried than I am if I didn’t expect to be out of America and off the hook for Illinois prison janitors’ pension benefits by 2018.